FY 2018 Maryland Budget Highlights

MARYLAND

BUDGET HIGHLIGHTS

FY 2018

LAWRENCE J. HOGAN JR., GOVERNOR BOYD K. RUTHERFORD, LT. GOVERNOR

January 18, 2017

The Honorable Thomas V. "Mike" Miller and the Senate of Maryland The Honorable Michael E. Busch and the Maryland House of Delegates The People of Maryland

Dear Mr. President, Mr. Speaker, Members of the Maryland General Assembly and Fellow Marylanders:

In the past year, while Maryland's economy and revenues have continued to grow, the state has been repeatedly reminded that it must remain on the path of fiscal responsibility that our administration embarked upon two years ago.

This budget responsibly holds the line on spending without raising taxes, cutting services, or borrowing from special funds. In fact, this budget allocates less spending in general funds than last year, while leaving $1 billion in reserves and continuing ? for the third straight year ? to fund K-12 education at an all-time record level. Our administration is investing $6.4 billion into K-12 education, approximately $28 million more than in Fiscal Year 2017. We are again fully funding education aid, including the Geographic Cost of Education Index and we are also providing more than $334 million for school construction, representing one third of the Fiscal Year 2018 capital budget.

This structurally balanced budget also makes responsible investments in higher education, holding tuition increases at the University System of Maryland, Morgan State University and St. Mary's College to 2 percent. Community colleges are fully funded in this budget at more than $256 million. This includes an additional $4 million above the formula funding and is a new record high level.

The administration's budget also maintains a critical social safety net for Marylanders and provides a 2 percent increase for most human service providers. In addition, we continue to increase our investments in programs that will create jobs and enhance our workforce, such as $4 million in new funding for the nationally recognized Employment Advancement Right Now (EARN) program, along with funding for the planning of six new Pathways in Technology Early College High Schools (P-TECH) across the state.

Our state is on the right track and our administration, with your support, is clearly changing Maryland for the better. Revenues are growing, unemployment is down, and 70,000 new jobs have been created since January 2015.

Our revenues are projected to grow by more than three percent over the next five years; however, that rate of growth does not keep pace with the level of legislatively mandated spending growth. This is one of the major contributing factors to the chronic structural gap the state has previously and is currently facing.

This budget again limits borrowing to $995 million, something we must do in order to keep our debt service payments from rising completely out of control. Even now, due to years of over-borrowing by previous administrations, our annual debt service payments are the fastest growing line item in the budget. In fact, next year, the state will be forced to spend more on debt service than on school construction, a sobering notion that should demand every leader's full attention.

Our administration recognizes the revenue volatility the state has consistently experienced. While revenues have steadily grown, they have often fallen short of the growth rates projected. Despite facing repeated calls to increase spending, our administration has wisely kept additional funds in reserve, funds that, due to this revenue volatility, proved to be necessary in crafting this budget.

This budget complies with all of the recommendations put forward by the legislature's Spending Affordability Committee. In fact, it exceeds those recommendations. For example, our administration's FY 2018 budget is 100 percent structurally balanced ? not 50 percent balanced as recommended. Additionally, we have left a fund balance of $144 million ? more than recommended. We urge the General Assembly to pass a budget that maintains these levels.

Our state has made significant progress over the past two years but there is still work to be done. Again, for the third year, I am asking for your help to enact meaningful mandated spending reform to return predictable, common sense budgeting practices to our state. Every family in Maryland understands that you cannot spend money you do not have. It's time for the state to live by that timehonored adage as well.

Moving forward, if we continue to budget responsibly and remain fiscally vigilant, I know Maryland will become an even better place to live, work and raise a family. Our entire administration greatly looks forward to working with you to achieve these goals we all share.

Sincerely,

Larry Hogan

Governor

Table of Contents

Revenues

6

Expenditures

7

Budget in Brief

8

Economic Development and Jobs

10

Quality of Life

13

Capital Budget

17

Capital Budget for Transportation

21

Supporting Local Government

24

Appendices

37

Some totals and percentages in this book may not add due to rounding.

Revenues

Other Special Funds

13%

Other General Funds 4%

Lottery 1%

Corporate Income Tax

2%

Fuel Taxes

2%

Transportation Revenues

5%

Federal Fund Revenue 30%

Higher Education Revenues

10%

Revenues ($ in millions)

Federal Fund Revenue Individual Income Tax Sales Tax Higher Education Revenues Transportation Revenues Fuel Taxes Corporate Income Tax Lottery Other Special Funds Other General Funds

Total Revenues

Volkswagen Settlement Revenue Lottery Adjustments Maryland Environmental Service DLLR - SAEF Revenues

Total Available

Sales Tax 11%

FY 2016 FY 2017

11,224 8,518 4,504 3,848 2,075 1,007 1,129

632 4,542 1,827

12,876 8,991 4,662 4,290 2,120 1,033

972 601 5,225 1,773

39,306 42,543

12 2 2

39,306 42,559

Individual Income Tax 22%

FY 2018

12,979 9,400 4,811 4,367 2,147 1,048 1,045

614 5,462 1,714

43,588

Percent Change '18 over '17

1% 5% 3% 2% 1% 1% 8% 2% 5% -3%

2%

Percent Total Revenues

30% 22% 11% 10% 5% 2% 2% 1% 13% 4%

1

43,589

2%

6

Expenditures

Legislative, Judicial, Legal 2%

Natural Resources and

Environment

2%

Public Safety

5%

Public Debt 3%

Other 4%

Human Resources

7%

Health 32%

Transportation

12%

Higher Education 15%

Expenditures ($ in millions)

FY 2016

FY 2017

Elementary and Secondary Education 18%

FY 2018

Percent Change '18 over '17

Percent Total Expenditures

Health

12,285

13,856

14,057

1%

32%

Elementary and Secondary Education

7,514

7,820

7,954

2%

18%

Higher Education

5,995

6,314

6,431

3%

15%

Transportation

4,548

5,087

5,166

2%

12%

Human Services

2,900

3,031

2,998

-1%

7%

Public Safety

2,140

2,195

2,207

1%

5%

Natural Resources and Environment

750

935

969

4%

2%

Legislative, Judicial, Legal

747

800

824

3%

2%

Public Debt

1,121

1,191

1,250

5%

3%

Other

1,487

1,700

1,705

0%

4%

Estimated Reversions

(30)

(30)

Total (less Reserve Fund)

39,486

42,899

43,532

1%

Reserve Fund

93

175

10

-94%

0%

Net Total

39,578

43,074

43,542

1%

Figures reflect proposed deficiencies, contingent reductions and back-of-the-bill reductions.

7

Budget in Brief

The governor's FY 2018 budget is both fiscally re sponsible and structurally balanced. This budget keeps spending in check without raising taxes, cut ting services or borrowing from special funds. In fact, this budget allocates less spending in general funds than last year, while leaving $1 billion in re serves and continuing, for the third straight year, to fund K-12 education at an all-time record level. The administration's commitment to fiscal discipline is reflected in the continued effort to achieve ongoing mandate relief in the out years.

The FY 2018 budget spends $17.1 billion and main tains $1 billion in cash reserves for any future write downs in revenues. In addition, the FY 2018 budget is less than FY 2017 spending.

Revenue Picture t Actual revenues for FY 2016 came in $250 mil

lion below the estimate. t This shortfall carried forward into FY 2017,

where revenues were revised downward by a total of $379 million. t FY 2018 revenues were written down by a total of $442 million, with General Fund revenues now projected to come in $55 million less than the FY 2017 budget approved by the General Assembly during the 2016 Legislative Session. t These adjustments to revenue estimates were largely due to weaker than expected withhold ing growth, non-wage income underperform ing, and higher corporate tax refunds.

The Administration Response t Revenue write downs consumed what was an

estimated fund balance of $363.3 million at the end of FY 2017 when the General Assembly closed session. t The sizable fund balance, together with the ad ministration's decision not to spend restricted funds out of the Reserve Fund, provided a

cushion in FY 2017 to soften the impact of the significant decline in anticipated revenues. t Recognizing the need to act expeditiously to address the eroding fund balance and decline in revenues, the administration sought the Board of Public Works' approval of $82.3 million in FY 2017 budget reductions, as part of a $105 million package of budget balancing solutions. t Many of the reductions approved in November were carried forward into the FY 2018 budget. t Despite these prudent actions, the December 2016 Spending Affordability Committee report forecasts an FY 2017 shortfall of $209 million. t In order to resolve the remaining FY 2017 shortfall, Goveror Hogan has limited deficiency spending, made additional budget reductions, and made prudent use of the Rainy Day surplus greater than 5 percent of state revenues.

FY 2018 Budget Solutions The administration's FY 2018 budget proposal ad dresses a $544 million shortfall and positions the state to remedy any future revenue shortfalls. Gov ernor Hogan's budget: t Spends less in General Funds in FY 2018 than

in FY 2017 t Holds Total Fund growth to 1.1 percent--the

second-lowest year-over-year percentage in crease since at least 1970 t Leaves a surplus of $144 million--more than was recommended by the General Assembly's own Spending Affordability Committee t Leaves $1 billion in cash reserves at the end of FY 2018, including the $144 million surplus t Eliminates the FY 2018 structural deficit, sur passing the Spending Affordability Commit tee's recommendation of a 50 percent reduction t Limits borrowing for capital projects to $995 million in FY 2018 in an effort to slow down the rapidly rising General Fund subsidy for debt service

8

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